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August 19, 2013

Time for Silver to Outshine Gold?

Mike McGlone of ETF Securities says there are several reasons the humbler precious metal could be back in favor

Like gold, silver is having a nice run, and investors are taking notice.

The iShares Silver Trust ETF (SLV) moved up 9% last week, while the SPDR Gold Shares ETF (GLD) ticked up 2%.

To understand the major factors driving the uptick in silver, ThinkAdvisor spoke with Mike McGlone, CFA, FRM, director of U.S. research for ETF Securities in New York.

Gold-to-Silver Price Ratio

This ratio can give investors a sense of relative valuation.

Before 2008, it took roughly 50 ounces of silver to buy one ounce of gold, says McGlone. During the recent economic crisis, the ratio increased to 80.

As of early August, the ratio was 66-to-1.

At that level, says McGlone, it “looks like silver at 66 is generally pretty cheap vs. gold, or you can say gold is rich vs. silver.”

Price Chart Action

The ETFS Physical Silver Shares Fund (SIVR) peaked above $34 last October and dropped below $19 in late June. The shares rebounded slightly in late June and have since held steady just under $20.

Nonetheless, the 50-day exponential moving average is well below its 200-day average, and SIVR’s price is still below both averages.

Still, McGlone says, this is just the short-term story.

“In the bigger picture, the market has been really rallying for the last, as we know it, 12 years,” he explained. “So, we view, and certainly I view this as a bit of a correction within the trend.”

McGlone hesitates to call silver oversold, but he points to historical price movements as an indicator of how that condition could develop.

Silver was down 34% since the beginning of this year in early August. If that result holds through year-end, it would be the third-worst annual price performance since 1955.

At one point it was 36% below its 200-day moving average, McGlone notes. During the crisis of 2008, he says, silver reached a low of about 42% below its 200-day moving average.

At those levels the market presents an opportunity to get back in, McGlone believes.

“Of course, picking bottoms is always difficult. But we look at it in the relative value basis, and it’s not just a day trade. It’s not something you just say, ‘Fine, I’m going to buy it today, and it’s going to go up,’ ” he says.

“You start to scale in, and you look at, this is very attractive levels. And, we view 20 as kind of that bottom line, very attractive level. Not to say it can’t get a bit lower,” the expert noted. “But in the long return, we think the trend should continue, and the market should rally from current levels.”

Options Pricing and Upside

ETF Securities believes that a sustained move above $20 could indicate a new bottom.

Since the beginning of 2011, there has been a generally direct relationship between the silver put-call ratio 20-day moving average and the silver price.

In late July, the silver put-call ratio’s 20-day moving average spiked to the highest level since December, when the price of silver was $33 an ounce, highlighting rising investor optimism about the outlook for prices.

Growing Demand

Another reason for McGlone’s bullish outlook: increased demand from industrial users and investors.

Low prices should spur industrial purchases of silver, helping to provide an increase in demand. Investors are also responding to the sub-$20 price.

“The investor demand has been very strong, and that’s been notably pointed out through U.S. Mint sales,” he said. “U.S. Mint sales have been off the charts and just basically are running at records.”

Mint sales for silver coins “are running at a pace of about 50 million ounces, and the most ever was in 2011 — that’s for the entire year and that’s if they continue at the same pace," McGlone said. "(The) most ever, in terms of sale of silver coins from the U.S. Mint was 40 million ounces in 2011.”